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Taxation of cooperatives

Taxation of cooperatives

by Recel P. Cachuela

The Cooperative Code of the Philippines (Republic Act No. 6938) declares the policy of the State to foster the creation and growth of cooperative as a practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice.

To encourage their formation and organization, cooperatives were granted tax incentives under the Cooperative Code. The incentive vary depending on whether  the cooperative does business exclusively with members or deals with non-members.

Cooperatives dealing exclusively with members are not subject to any government taxes or fees imposed under the internal revenue laws and other tax laws. For national taxes, the tax exemptions, as clarified under Revenue Regulations (“RR”) No. 20-01, include the following:

a.   Income tax on income from operations
b.   Value-added tax, subject to certain conditions
c.   3% percentage tax
d.   Donor's tax subject to certain limitations
e.   Excise tax
f.    Documentary stamp tax (DST)
g.   Annual registration fee of P500.00

They are also exempt from local taxes, except service charges or rentals for the use of property and equipment or public utilities owned by local government units, as confirmed through various rulings issued by  the Bureau of Local Government Finance.

For cooperatives dealing with both members and non-members, the taxability of the transactions depends on whether or not the accumulated reserves and undivided net savings (ARUNS) exceeds P10 million.  If the ARUNS is within the P10 million threshold, the cooperative enjoys the same incentives as cooperatives dealing with members only.

Those with ARUNS exceeding the P10 million threshold are subject to income tax on transactions with non-members after the lapse of 10 years from the date of registration with the CDA.  They are, likewise, subject to donor’s tax, DST, excise tax and local taxes.  RR No. 20-01 further clarified that the income of cooperatives, regardless of classification, from transactions not related to their principal operation are subject to the appropriate taxes under the Tax Code. 

Despite the clear exemptions of cooperatives from taxes, many cooperatives are still swamped with deficiency tax assessments from the Bureau of Internal Revenue. Should these cooperatives be made liable for taxes even if the exemption is clearly provided in the law? Is the failure to comply with administrative requirement sufficient basis for divesting cooperatives of the tax exemption privileges?

For example, RR No. 20-01 requires the cooperatives to apply for Certificate of Exemption (COE) through the Legal Services of the Revenue Region having jurisdiction over the cooperatives’ principal place of business. This is not, however, imposed as a requisite for the availment of the tax exemption. Neither does the law require a Certificate of Exemption as a condition for the enjoyment of the tax exemption privileges. Thus, cooperatives could not be denied the incentives provided in the law merely for failure to comply with the administrative requirement. 

Another pressing issue affecting particularly savings and credit cooperative (SSC) is its supposed obligation, as withholding agent, to withhold 20% final tax on the interest expenses paid to member-depositors.  In the February 2006 draft Manual of Rules and Regulations for Cooperatives with Savings and Credit Services in the Philippines, it is provided that SSCs are required to withhold and remit 20% final tax on interest income earned by the member-depositors. It is to be noted that the  Tax Code requires  a final tax of 20% only upon the amount of interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangement.  Considering th at a cooperative is not a bank, the interest derived by the members should be exempt from final withholding tax.
These are only some of the many challenges that the cooperatives face in terms of complying with their tax obligations. If the cooperatives are to be considered as vehicles for  promoting self-reliance aimed towards the attainment of economic development and social justice, these should be accorded the benefits clearly intended by the law. In fact, every government agency, including the revenue tax authority, is expected to ensure that  cooperatives develop into viable and responsive economic enterprises free from any conditions that may infringe upon their autonomy or organizational integrity.
(The author is a tax manager at the Davao branch of Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, please e-mail the author).